Bank Regulatory News and Trends

This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.

In this edition:

• Fed chair, vice chairs and new board members confirmed by Senate; nominee for top bank supervision post advances.
• FedNow: Federal Reserve issues new rules to facilitate instant payments.
• Bank regulators seek input on CRA overhaul proposal.
• CFPB invokes “dormant” authority to regulate fintechs.
• FinCEN issues proposal on “no-action letter” process for anti-money laundering compliance.
• California DFPI issues final regulations on commercial financing disclosure law.
• FDIC issues draft climate risk management principles.
• FDIC asks banks for notification on crypto activities.
• Banking agencies propose updates to rules on administrative procedures.
• New York DFS issues guidance for stablecoins.
• New York legislature passes bitcoin mining moratorium.

Fed chair, vice chair and new board members confirmed by Senate; nominee for top bank supervision post advances. There will be some continuity and some changes atop one of the key banking regulatory agencies, with the US Senate’s confirmation of President Biden’s nominations for chair and vice chair as well as two new members of the Federal Reserve Board of Governors. Meanwhile, the president’s nominee for the Fed’s chief supervisory post has advanced to the Senate floor, following the failure of his first nominee to win support in the Senate.

• Powell reconfirmed as Fed chair. Jerome Powell, who has led the Fed’s response to the economic and financial fallout from the COVID-19 pandemic, will serve a second four-year term as chair of the Board of Governors, on the strength of an 80-19 bipartisan vote in the Senate on May 12. Policymakers and other Fed watchers will be closely scrutinizing Powell’s efforts to rein in inflation while undoing many of the Fed’s COVID-19-era policies. Powell was nominated by President Trump to his first term as chair in 2017. Although he is a Republican, Powell was first nominated to the Fed Board by President Obama as part of an agreement with the Senate. During the three presidencies in which he’s served, Powell has earned a reputation as a consensus-builder and a guardian of the Fed’s independence.
• Brainard approved as Fed vice chair. The Senate on April 26 voted to promote Fed board member Lael Brainard to vice chair of the board by a 52-43 vote. Brainard, who was first nominated to the board by President Obama in 2014, frequently cast dissenting votes against regulatory relief measures adopted by the Fed pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Dodd-Frank partial rollback law enacted in 2018. She has also been the Fed’s point person on updating the Community Reinvestment Act (CRA).
• Cook and Jefferson confirmed as Fed governors. Two of President Biden’s new nominees for full 14-year terms as members of the Fed board were also approved by the Senate – albeit with widely varying degrees of support:
  • Lisa Cook, the first Black woman to serve on the board of governors, was approved by a 51-50 party-line vote on May 10, with Vice President Harris breaking the tie. Cook, previously a professor of economics and international relations at Michigan State University, served at the White House Council of Economic Advisers under President Obama and was elected as a director of the Federal Reserve Bank of Chicago in January.
    
    
  • Philip Jefferson managed to avoid the partisan divisions that have marked much of the current round of Fed nominations, winning Senate confirmation by 91-7 on May 11. Jefferson, who becomes the fourth Black man to serve on the board, has been a professor of economics at Davidson College. He also served on the Board of Advisors of the Opportunity and Inclusive Growth Institute at the Federal Reserve Bank of Minneapolis and is a past president of the National Economic Association.

• Barr, nominated as Fed’s vice chair of supervision, clears Senate Banking. President Biden’s nominee to serve as vice chair of supervision has won bipartisan support in the Senate Banking Committee. The president nominated former Treasury official Michael Barr as the next vice chair of supervision, a post created under Dodd-Frank with a four-year term. He would be the second person to serve in that capacity, charged with overseeing the nation’s largest banks, following Randal Quarles, who served from 2017 to 2021. Barr is currently a professor of public policy at the University of Michigan's Gerald R. Ford School of Public Policy and also teaches at the university’s law school. He served as Under Secretary of the Treasury for Domestic Finance and Assistant Secretary of the Treasury for Financial Institutions during the Obama administration. He is considered a key architect of Dodd-Frank and the creation of the Consumer Financial Protection Bureau and is expected to closely scrutinize bank mergers and rules for lending in lower-income neighborhoods. The committee’s June 8 vote in support of Barr’s nomination was 17-7. A confirmation vote in the full Senate is pending.
  • Biden’s first nominee as vice chair of supervision, Sarah Bloom Raskin, withdrew her nomination after encountering unified opposition from Senate Republicans and failing to win the support of pivotal Senator Joe Manchin (D-WV). Opposition to Raskin’s nomination largely centered on her support for integrating climate change risk analysis into the financial regulatory regime.
    
    
  • At his May 19 confirmation hearing, Barr told lawmakers that the Fed’s authority on climate change is “important but quite limited.”

• FedNow: Federal Reserve issues new rules to facilitate instant payments. The Federal Reserve Board has announced the issuance of new rules to provide the regulatory framework necessary to support an interbank real-time gross settlement service with integrated clearing functionality. Known as the FedNow Service, it is intended to be available on a 24x7x365-basis and to support instant payments in the US. According to its May 19 announcement, the Board hopes to bring the FedNow Service online in 2023. Effective October 1, 2022, the rules will be included as a new subpart to Regulation J (12 C.F.R. part 210), which has traditionally provided the regulatory framework for the collection and return of checks through the Federal Reserve System (subpart A) and the terms and conditions governing funds transfers over the Fedwire Funds Service (subpart B).
  • One feature of new subpart C is its incorporation of the provisions of Article 4A of the Uniform Commercial Code, or the UCC, to transfers over the FedNow Service, to the extent that these provisions are not otherwise inconsistent with the Board’s rules. The Board based the decision to do so on the belief that the benefits of such a structure outweighed the burdens of needing to determine whether, and to what extent, a particular transaction may be governed by one or more provisions found in UCC Article 4A, the Electronic Funds Transfer Act (EFTA) or the Board’s FedNow Service rules. These benefits included the ability for financial institutions to be protected from consequential damages (unless provided otherwise in express written agreement), which is believed to reduce costs associated with the speedier transactions. To the extent that a transfer conducted over the FedNow Service is also an “electronic fund transfer” under the EFTA, the provisions of both subpart C and the EFTA would govern, with the EFTA prevailing over any inconsistency – providing a level of consumer protection to immediately settled consumer transactions.
  • Although the primary objective of the new rules will be to provide real-time funds availability, the Federal Reserve did not define what it means to provide funds “immediately.” In an effort to speed settlement, the rule limits instances where a beneficiary’s bank may request additional time to determine whether to accept a payment order only in instances where the bank has a reasonable basis to believe that the beneficiary is not entitled or permitted to receive the payment. Examples of these situations discussed in the rule’s commentary include situations where the recipient may be barred by US sanctions or where there is known fraudulent activity.
  • Finally, the Fed will continue to work with industry stakeholders to refine and address erroneous or misdirected payments. Currently, the sending bank has 60 calendar days after notice that a payment order has been accepted or that its settlement account was debited to inform a Federal Reserve Bank of facts concerning unauthorized or erroneously executed payment orders for purposes of UCC Article 4A.

Bank regulators seek input on CRA overhaul proposal. Three key banking regulatory agencies have jointly issued a proposal to modernize regulations implementing the Community Reinvestment Act, the landmark law intended to encourage greater community lending, particularly in low- and moderate-income (LMI) neighborhoods. The joint notice of proposed rulemaking and request for comment was unveiled on May 5 by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), the agencies charged with implementing and enforcing the CRA.  According to a fact sheet issued by the agencies, the five main goals of the proposal are to:

• Expand access to credit, investment and basic banking services in LMI communities.
• Adapt to changes in the banking industry, including internet and mobile banking.
• Provide greater clarity, consistency and transparency.
• Tailor CRA evaluations and data collection to bank size and type.
• Maintain a unified approach from the bank regulatory agencies and incorporate extensive feedback from stakeholders.

The long-awaited proposal represents a meeting of the minds between the Fed, the FDIC and the OCC after several years in which the agencies were unable to agree upon a unified approach for overhauling the CRA. In 2020, the OCC independently issued a rule on modernizing the CRA, but the other two agencies did not get behind OCC’s proposal, setting up the potential for regulatory confusion. As we reported in the February 3, 2022 edition of Bank Regulatory News and Trends, the OCC rescinded its 2020 CRA rulemaking last December. According to an April 26 Fed Board staff memo, the agencies’ joint draft proposal “evaluates bank engagement across geographies and activities, and promotes financial inclusion and transparency by providing enhanced data disclosures.” The memo explains that the new rule “introduces the use of standardized metrics in CRA evaluations for certain banks and clarifies eligible CRA activities focused on LMI communities and non-metropolitan communities.”

• The CRA was enacted into law in 1977 to help address economic challenges in communities that had suffered from decades of disinvestment and inequitable access to credit and other financial services, due in large part to the practice known as “redlining.” The agencies have twice revised the regulations governing implementation of the CRA, with a major revision occurring in 1995 and a subsequent, less expansive update adopted in 2005. Since then, the agencies have published and updated a series of Q&As providing guidance to banks, the general public and the regulators themselves.
• Fed Board member Lael Brainard, recently installed as vice-chair, stated that, “the proposal adapts to the expanded role of mobile and online banking by updating the approach for where banks are evaluated for their CRA performance. While maintaining a focus on bank branches, the proposal also evaluates large bank performance in areas where they have a concentration of mortgage or small business lending. And it provides certainty that banks can receive CRA credit for eligible community development activities nationwide.”
• But Board member Michelle Bowman, while expressing support for issuing the proposed rule for public comment, said, “there are several provisions in the proposal that will impose significant costs and burdens on banks, specifically those with assets above $10 billion. Under the proposal, these banks would have to collect and report extensive new information on deposit accounts, automobile loans, usage of mobile and online banking services, and community development loans and services, as well as detailed information about branches.”
• Comments on the proposal will be accepted on or before August 5, 2022.

The proposal does not include climate- and other ESG-related investments and activities as independently qualifying for CRA credit; however, same expect that to become a particular point of discussion during the public comment process.

CFPB invokes “dormant” authority to regulate fintechs. The Consumer Financial Protection Bureau has announced that it will invoke a largely unused legal provision to examine nonbank financial companies that the agency has determined are posing risks to consumers. In CFPB’s April 25 announcement, the agency noted that the supervisory authority it is now invoking was originally granted under a section of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which authorizes the bureau to supervise a nonbank when the bureau has “reasonable cause” to believe that the entity is engaging, or has engaged, in conduct that poses risks to consumers in the provision of financial products or services.  In 2013, CFPB adopted a Procedural Rule to Establish Supervisory Authority over Certain Nonbank Covered Persons Based on Risk Determination to implement that provision, but is only now invoking that authority. CFPB’s final rule states that firms targeted under the provision would be notified and provided with a “reasonable opportunity” to respond. Dodd-Frank authorizes the Bureau to require reports from and conduct examinations of nonbanks subject to supervision under the statute. The agency asserts that utilizing this authority will “help protect consumers and level the playing field between banks and nonbanks” and that the rule is a response to the rapid growth of consumer financial services offered by financial technology firms, or fintechs. “This will allow the CFPB to be agile and supervise entities that may be fast-growing or are in markets outside the existing nonbank supervision program,” the bureau stated in its announcement.

• The CFPB on April 29 published in the Federal Register a new procedural rule intended to make the process more transparent.

FinCEN issues proposal on “no-action letter” process for anti-money laundering compliance. The Financial Crimes Enforcement Network (FinCEN) is seeking public comment on a proposal to provide regulatory relief by implementing a no-action letter process at the agency. FinCEN published an advance notice of proposed rulemaking in the Federal Register on June 6 outlining the proposed process. A no-action letter serves as a form of enforcement discretion in which an agency states in writing that it will not take an enforcement action against a submitting party for specific conduct presented to the agency. The proposal follows FinCEN’s report to Congress, issued in June 2021, which was completed pursuant to the Anti-Money Laundering Act of 2020 and developed in consultation with other federal regulators and state banking and credit union supervisors. The report concluded that FinCEN should proceed with a no-action letter process to supplement the existing forms of regulatory guidance and relief that third parties may request, including administrative rulings and exceptive or exemptive relief. FinCEN is soliciting public comment in part as to how the proposed new process would overlap or interact with those other forms of guidance and relief already available.

• FinCEN is a bureau of the Treasury Department that collects and analyzes information on financial transactions to combat domestic and international money laundering, terrorist financing and other financial crimes.
• Comments on the proposed rulemaking should be submitted by August 5, 2022.

Historically, FinCEN issued public opinions and responses to inquiries from companies unsure of their status or obligations under the Bank Secrecy Act; however, that practice was curtailed because some argued it allowed for financial services firms to argue their status as unregulated actors based on similar facts determined to be outside of scope in other instances. While a formal no-action letter process may be beneficial for firms, we caution that parties operating in reliance on prior opinions may find that banks, investors and counterparties require the company to obtain a no-action letter confirming their position.

California DFPI issues final regulations on commercial financing disclosure law. Beginning December 9, 2022, persons providing commercial financing (including small business loans and merchant cash advances) to borrowers “whose business is principally directed or managed from California” will be required to provide borrowers with consumer-like disclosures. The California Department of Financial Protection and Innovation (DFPI) issued final regulations on June 9 to implement SB 1235, the California Commercial Financing Disclosure Law (CCFDL). While the CCFDL was signed into law on September 30, 2018, it could not take effect until the DFPI issued final regulations. Under the CCFDL, a provider of commercial financing must disclose, at a minimum, the following terms at the time the provider extends the financing offer:

1. The total amount of funds provided.
2. The total dollar cost of the financing.
3. The term or estimated term.
4. The method, frequency and amount of payments.
5. A description of prepayment policies.
6. The total cost of the financing expressed as an annualized rate.

The regulations provide detail as to format and content of the disclosures, and those requirements vary depending on the type of commercial financing offered. The regulations also contain very specific requirements for closed-end transactions, factoring transactions, commercial open-end credit plans, sales-based financing, lease financing and asset-based lending transactions.

• The CCFDL contains exemptions and carve-outs for, among other things, depository institutions, financings of more than $500,000, closed-end loans with a principal amount of less than $5,000 and transactions secured by real property.  However, while depository institutions are exempt, the CCFDL treats certain nonbank partners as “providers” subject to the law’s disclosure requirements.  Specifically, a “provider” is defined to include “a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution.”
• New York has yet to issue final regulations implementing its Commercial Finance Disclosure Law.

FDIC issues draft climate risk management principles. The FDIC has issued draft principles providing guidance as to how large financial institutions should manage financial risk related to climate change. Published in the Federal Register on April 4, FDIC’s Statement of Principles for Climate-Related Financial Risk Management for Large Financial Institutions is intended to offer “a high-level framework for the safe and sound management of exposures to climate-related financial risks, consistent with the risk management framework described in existing FDIC rules and guidance and are intended to support efforts by financial institutions to focus on the key aspects of climate risk management.” While FDIC’s Financial Institution Letter is primarily targeted at banks with over $100 billion in total consolidated assets, the agency notes that “all financial institutions, regardless of size, may have material exposures to climate-related financial risks.” The proposed guidance seeks to address “weaknesses in how financial institutions identify, measure, monitor, and control the financial risks associated with a changing climate” that “could adversely affect a financial institution’s safety and soundness, as well as the overall financial system.” In a March 30 statement, acting FDIC Chair Martin Gruenberg said he expects additional guidance will have to be issued “that provides clear supervisory expectations regarding the application of each of the general principles” recently announced. Gruenberg said, “the proposed Statement of Principles represents an initial step” and the agency “plans to elaborate on each of these principles” in a manner “appropriately tailored to reflect differences in financial institutions’ circumstances, including size, complexity of operations, and business model.”

FDIC asks banks for notification on crypto activities. The FDIC is urging all financial institutions supervised by the FDIC to let the agency know of any plans to provide services related to cryptocurrencies. In an April 7 Financial Institution Letter, FDIC notes the “dynamic nature of crypto-related activities” and the difficulty for both banks and regulators “to adequately assess the safety and soundness, financial stability, and consumer protection implications without considering each crypto-related activity on an individual basis.” Banks that have already embarked upon crypto-related activities are also urged to contact the FDIC immediately if they have not already, and banks should also consult with their state regulators, the letter recommends. FDIC cited as crypto risk considerations the safety and soundness of the banking system, financial stability, consumer protection and legal implications.

• As reported in the February 3, 2022 edition of Bank Regulatory News and Trends, the Office of the Comptroller of the Currency last November issued a similar Interpretive Letter on the authority of banks to engage in cryptocurrency activities. OCC, FDIC and the Fed also issued a November 23, 2021 Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps, outlining the agencies’ process to “provide coordinated and timely clarity” in regulating the emerging crypto-asset sector.

Banking agencies propose updates to rules on administrative procedures. Four of the major federal bank regulatory agencies have issued a proposal to update and modernize the rules governing formal administrative proceedings for insured depository institutions. The interagency proposal, published in the Federal Register on April 13, would amend the Uniform Rules of Practice and Procedure to align them with current practices, recognizing and facilitating the use of electronic communications and technology in all aspects of administrative hearings. The proposal – jointly developed by the Federal Reserve, the FDIC, the OCC and the National Credit Union Administration – is intended to increase the efficiency and fairness of administrative adjudications. In addition, the Fed, FDIC and OCC are proposing to modify their agency-specific rules of administrative practice and procedure, or Local Rules. The OCC also proposes to integrate its Uniform Rules and Local Rules so that one set of rules applies to both national banks and federal savings associations and to amend its rules on organization and functions to address service of process. The agencies indicate that the proposed local rules will increase transparency in administrative actions by fostering communication and cooperation between parties, formally adopting procedures currently followed in administrative proceedings and provide for the possibility of limited depositions during discovery.

New York DFS issues guidance for stablecoins. The New York state Department of Financial Services (DFS) on June 8 released new guidance on the issuance of US dollar-backed stablecoins. Baseline criteria include the requirement that stablecoins be fully backed by a reserve of assets and redeemable by investors. Issuers of stablecoins must adopt redemption policies approved in advance and in writing by DFS, and the reserve assets must be segregated from the proprietary assets of the issuing entity and be held in custody with federally- or state-chartered depository institutions and/or asset custodians. The reserve will have to consist of the following assets: US Treasury bills acquired by the issuer three months or less from their respective maturities; reverse repurchase agreements fully collateralized by Treasury bills; Treasury notes and/or bonds on an overnight basis, subject to DFS-approved requirements concerning overcollateralization; and deposit accounts at chartered depository institutions. In addition, the reserve will be subject to an examination at least once per month by an independent, licensed CPA. The guidance also reminds issuers they are still subject to other regulation and oversight regarding cybersecurity, Bank Secrecy Act/anti-money-laundering compliance, consumer protection, and safety and soundness. DFS Superintendent Adrienne A. Harris noted that New York has been a national leader in this emerging regulatory space and said the new guidance “creates clear criteria for virtual currency companies looking to issue USD-backed stablecoins in New York.”

New York legislature passes bitcoin mining moratorium. The New York state Assembly and Senate have passed what could become the nation’s first cryptocurrency mining moratorium – pending the approval of the state’s governor. The Senate on June 3 passed the measure, Senate Bill S6486D, following the state Assembly, which approved the bill in May. The legislation would impose a two-year moratorium on new “proof-of-work” mining projects powered by carbon-based fuel. Existing mining firms, or those already undergoing the permit renewal process, would be allowed to continue operations. Proof-of-work mining is an authentication method used to validate blockchain transactions. The process, which is considered highly electricity-intensive, requires members of a network to expend effort solving mathematical puzzles to prevent gaming the system. Upstate New York has been seen as an attractive location for crypto mining firms because of its abundant hydroelectric energy sources. In more recent years, however, mining firms have also repurposed defunct coal power generation facilities, in some cases converting to natural gas. During the moratorium, the state will conduct a study on the potential environmental impact of proof-of-work mining. The legislation has been championed by environmental activists while the digital technology and financial services industries have warned that the measure could have a chilling effect on investment in the Empire State.

• The legislation now awaits action by Governor Kathy Hochul (D), who has not yet indicated if she plans to sign or veto the bill. At a May press conference in Albany, the governor said, “We have to balance protecting the environment but also need to protect the opportunity for jobs … and making sure that the energy consumed by these entities is managed properly.”